Accruing Woes
February 19, 2009
Finance minister Peer Steinbrueck (SPD) warned on Thursday, Feb. 19, that there was the danger of a "second Lehmann Brothers" if the state did not step in and nationalize the mortgage lender.
Hypo has already received 87 billion euros in guarantees over the past year.
"The bank's total balance sheet amounts to 400 billion euros. Its scale indicates how important it is to the international finance market," said Steinbrueck.
Germany is legally liable for the bank's debt, but does not "possess a single share," Steinbrueck told the Passauer Neue Presse. "If the state is the owner, the bank's refinancing options and its capital requirements will be much improved. It will proft from the state's high credit worthiness."
Amicable arrangement unlikely
The finance minister said he saw little prospect for an amicable settlement with the bank's biggest stakeholder, US private equity firm JC Flowers.
"There is the possibility of making a takeover bid. But Mr. Flowers will have a price in mind that far surpasses what would be paid in the case of an expropriation, measured against current share prices," said Steinbrueck.
Flowers purchased the stock last year for 22.50 euros a share, but prices have since fallen to just over 1.50 euros.
Breaking a taboo
On Wednesday, Chancellor Angela Merkel's cabinet approved new, temporary draft legislation allowing the government to seize control of troubled banks -- a clear response to the precarious situation at HRE.
Just hours later, the Frankfurter Allgemeine Zeitung reported that the Hypo could require additional state guarantees to the tune of 20 billion, as well as another 10 billion euros to fulfil minimum capital requirements.
HRE has to present its annual results by 31 March at the latest, there is speculation in the banking sector that these will reveal that the bank is not adequately capitalized, according to the FAZ.
German justice minister Brigitte Zypries, SPD, rejected criticism of the nationalization plans from heads of industry and senior members of the Free Democrats. She warned that a possible collapse of HRE could cause a domino effect in Germany's banking sector.
"The expropriation of the HRE is a last resort. But the state wiill possible be forced to take that step because a collapse of the HRE would negatively affect all other banks," Zypris told German radio station Deutschlandfunk.
She added that the proposed legislation would only be in place until 30 June, thus ruling out the possibility that other banks would be affected.
Zypries said she was also expecting legal challenges to the draft bill. Shareholder lobby groups have already announced they will sue.
Steinbrueck is arguing in favor of the state taking over at least a 75 percent plus one share stake in the institute. The finance minister said he could not say how long HRE would remain in public hands, if the nationalization were to go ahead.
"I am not going to commit myself to saying when it would be resold. I simply don't know. We will talk about money at the point when the bank is in a shape that there are parties interested in buying the state's stake," he added.
The finance minister said HRE needed to be "stabilized and restructured" on the basis of a "viable business model" put forward by the management. "No one in the German government has the ludicrous idea of suddenly taking over the reins," he told the Passauer Neue Presse.